Can Investors Sue Brokers over Coronavirus Losses?
Now that it appears the very worst of the coronavirus pandemic may be behind us, many investors are looking at the damage wrought by the health crisis to their retirement savings. And it is ugly out there.
The pandemic rocked markets like they have not been rocked since the global financial crisis of 2008-9. In many ways, the last few months have done more damage to the financial markets than even that historical moment in time. In fact, volatility was worse due to coronavirus, and many investors lost a very large portion of their investment accounts.
The question is — why? And the next question is — should your financial advisor have better protected you?
You Can Sue Your Financial Advisor — With Reason
Because the typical investment opening account documents including what is called a binding arbitration clause, suing your financial advisor is not quite the same as suing a doctor or a contractor who botched your roof. Many investors are not even aware of these arbitration agreements, but they are the standard in today’s financial industry. To keep it simple, a binding arbitration agreement is one in which you waive your right to sue your financial advisor and his/her brokerage firm in a court of law, and instead must litigate against them in the financial industry arbitration forum, run by industry watchdog, FINRA.
But before you can even contemplate suing your advisor, you must have a cause of action — a grievance; and damages. If you lost a significant amount of money during the extreme volatility of the coronavirus, you have damages. But perhaps your broker did nothing wrong? Certainly all of them will insist on that!
In order to have a case you must also have liability against your broker, and that requires some form of misconduct on their part. This could be any number of things, ranging from splashy criminal activity like Ponzi Schemes to the simple overconcentration or unsuitable investments in the account. Whatever the liability issue, if you’ve got one — and damages — you may be able to sue your stock broker through arbitration.
How to Figure Out If There’s Been Misconduct in Your Account
It can often be very difficult for the laymen to determine whether there has been significant misconduct in their account. Losses are usually pretty obvious, but the cause of those losses can be difficult to figure out. And it doesn’t help that a broker will insist that the market “goes up and down” and in order to really win you have to “stay the course.” Often these platitudes conceal misconduct.
The best way to figure out whether there has been broker misconduct in your account is to have another professional experienced in complex financial matters review your account for you. This can be another financial advisor, an accountant, or an attorney who specializes in securities litigation. Whoever you find, make sure it’s someone you trust and someone who knows what they are doing.
